1. Field of the Invention
This invention relates to facilitating payments by a third party. More specifically, it relates to automatically adjusting the effective interchange rate incurred for pre-approved or pre-authorized card payments to payees.
2. Brief Description of the Related Art
Interchange is a fee paid between banks for the acceptance of card-based transactions (such as VISA and MASTERCARD charges). Usually it is a fee that a merchant's bank (the “acquiring bank”) pays a customer's bank (the “issuing bank”) however there are instances where the interchange fee is paid from the issuer to acquirer. This is sometimes called reverse interchange.
In a credit card or debit card transaction, the card-issuing bank in a payment transaction deducts the interchange fee from the amount it pays the acquiring bank that handles a credit or debit card transaction for a merchant. The acquiring bank then pays the merchant the amount of the transaction minus both the interchange fee and an additional, usually smaller fee for the acquiring bank or ISO, which is often referred to as a discount rate, an add-on rate, or “passthru.”
Interchange fees are set by the credit card networks, and are the largest component of the various fees that most merchants pay for the privilege of accepting credit cards, representing 70% to 90% of these fees. Interchange fees have a complex pricing structure, which is based on the card brand, regions or locations, the type of credit or debit card, the type and size of the accepting merchant, and the type of transaction (e.g. online, in-store, telephone sale, whether the card is present for the transaction, etc.). Further complicating the rate schedules, interchange fees are often a flat fee plus a percentage of the total purchase price (including taxes). In the United States, the fee averages approximately 2% of transaction value and are set by the payment networks such as VISA and MASTERCARD.
Generally, the bulk of the interchange fee goes to the issuing bank. Issuing banks' interchange fees are extracted from the amount collected by the merchants when they submit credit or debit transactions for payment through their acquiring banks. Banks do not expect to make a significant amount of money from late fees and interest charges from creditworthy customers that pay their monthly bill in full. Rather, the banks make their profits on the interchange fee charged to merchants.
Interchange rates are set at differing percentages for a number of reasons. A premium credit card that offers rewards generally will have a higher interchange rate than do standard cards. Transactions made with credit cards generally have higher rates than those with signature debit cards, whose rates are often higher than PIN debit card transactions.
Card-not-present sales that are not conducted in person, such as by phone or on the Internet, generally are subject to higher interchange rates. Interchange is also set to encourage issuance and to attract issuing banks to issue a particular brand. Higher interchange is often a method to encourage issuance of their particular brand.
Interchange Example
Consider a consumer making a $100 purchase with a credit card. For that $100 item, the retailer would get approximately $98. The remaining $2, known as the merchant discount and fees, gets divided up. About $1.75 would go to the card issuing bank (defined as interchange), $0.18 would go to Visa or MasterCard association (defined as assessments), and the remaining $0.07 would go to the retailer's merchant account provider.
Card numbers are found on payment cards, such as credit cards and debit cards, as well as stored-value cards, gift cards and other similar cards. Some card issuers refers to the card number as the primary account number (PAN). They have a certain level of internal structure and share a common numbering scheme. Bank card numbers are allocated in accordance with ISO/IEC 7812. The bank card number merely identifies the card, which is then electronically associated by the issuing organization with one of its customers and then to the customer's designated bank account.
In the case of stored-value type cards, there is no necessary association with a particular customer. An ISO/IEC 7812 card number is typically 16 digits in length, and consists of: (a) a six-digit Issuer Identification Number (IIN) (also called the “Bank Identification Number” (BIN)) the first digit of which is the Major Industry Identifier (MII); (b) a variable length (up to 12 digits) individual account identifier; and (c) a single check digit calculated using the Luhn algorithm.
The first digit of a credit card number is the MIL which represents the category of entity which issued the card. For example, VISA, and MASTERCARD are in the banking and financial category and each use an Mil integer of 4 and 5 respectively.
Together, first six digits of a card number (including the initial MII digit) are known as the issuer identification number (IIN) or the BIN. These identify the institution that issued the card to the card holder. The IIN database and membership is managed by the American National Standards Institute (ANSI) and is updated monthly. ANSI is responsible for allocating IIN ranges to the issuing networks. Both VISA and MASTERCARD publish tables that set interchange reimbursement fees.
When payments are made through typical card transactions, the merchant is generally subject to the interchange rate of the card type accepted. Therefore, when a product or service is purchased by credit card, there is typically some uncertainty as to the exact amount the merchant will net because the interchange is variable.
An industry exists that pays a large number of benefit claims (e.g., warranty, medical, dental and the like) through virtual payment cards. This industry provides a faster means of payment to merchants with greater efficiency than traditional check payments. However, these virtual payments do incur interchange fee overhead. A long-felt need in the industry exists to dynamically generate virtual payment cards that meet predefined interchange fee targets. This need is met by the current invention.